Dead Cat Bounce!

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Many in the government and media, and even a statement from the Federal Reserve, are indicating that the recession is over or receding. France and Germany are reporting that they are out of the recession. China and India are observing strong growth and stimulus packages are influencing economic dynamics in the U.S. The Dow Jones Index is up from its 6,500 low in the spring, providing a boost of wealth to those who did not bail out of the equity markets.

History suggests bears will come out after a rally. This is frequently called the “dead cat bounce.” In the wake of the 1929 stock market crash, markets rallied 47% in just five months from their lows in November 1929. However, beginning in April 1930, the bears clawed 83% from the market over the next two years.

A similar trend occurred in the 1973-1974 bear market. In that period, stocks enjoyed a 53% rally after a major crash, crashed again and were at the same level three years later.

Now, let’s fast forward to current times. The stock market has had a similar rebound. The big question: What will happen to the economy after the government “takes the training wheels off” or no longer provides stimulus? Headwinds in the form of higher taxes, deficits and uncertainty over cap and trade, health care reform and possible economic “black swans” could be the impetus for a similar correction.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.